SCIENTX’s 1HFY23 results met expectations. Looking ahead, it is cautious on its plastic packaging segment due to softer exports amid the global economic slowdown. Also, rising mortgage rates and construction cost could dampen demand for properties including SCIENTX’s. We maintain our forecasts and TP of RM2.99 but downgrade our call to UNDERPERFORM from MARKET PERFORM as its valuations have become rich after the recent run up in its share price.

Within expectations. 1HFY23 core profit met expectations at 45% of both our full-year forecast and the full-year consensus estimate.

Results’ highlight. 1HFY23 revenue grew 7% driven by a 25% jump in property turnover on accelerating progress billings as the economy reopened, and strong take-up for its new launches. The plastic packaging segment reported a flat turnover as we believe reduced demand for industrial packaging amid a global economic slowdown was cushioned by increased sales of consumer packaging.

Core profit grew 5% driven by a 25% increase in property profits, partially offset by a 3% decline in plastic packaging profits due to cost pressures, particularly, from labour cost.

Key takeaways from its briefing:

1. SCIENTX guided for cautious outlook for its plastic packaging segment in 2HFY23 due to softer exports on the back of the global economic slowdown. The saving grace is that margins could sustain, thanks to a better product mix with more high-margin consumer packaging vs. thin-margin industrial packaging.

2. Its new robotic stretch film plant commenced operations in March 2023 with two cast-stretch film lines at a total capacity of 18k MT per year. The fully automated and integrated plant helps to improve productivity and reduce dependency on manual labour.

3. Its unbilled property sales stand at RM1.6b vs. RM1.3b three months ago. It is optimistic of improved sales underpinned by: (i) sustained demand for new launches with seamless construction progress, and (ii) new launches in Sungai Petani, Kedah.

4. SCIENTX has entered into a joint venture with Altitude (a developer in Thailand) and Creed Group (Japanese real estate investment group) for a stake of 24.5% in an affordable housing development project in Bangkok. The project is expected to start construction end of 2023 with a development size of c.10 acres. The rationale is to expand its affordable housing brand into new markets in Southeast Asia region.

Outlook. The prospects for its plastic packaging segment will continue to be weighed down by slowing demand for industrial plastic packaging on the back of the global economic slowdown though the consumer plastic packaging should stay resilient. Not helping either is the elevated operating cost on higher energy and labour costs. On the other hand, while its property division that focuses on the affordable residential segment seems to hold up relatively well, we are mindful of rising mortgage rates and construction cost that could push its products beyond the reach of some potential buyers.

Forecasts. Maintained.

We also maintain our TP of RM2.99 based on SoP valuation (see Page 3), valuing its plastic packaging business at 12x PER, at a premium to sector’s average forward PER of 10x to reflect its size, being one of the largest players in the region. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We are cautious on SCIENTX due to: (i) the weak outlook for its plastic packaging business on the back of the global economic slowdown, (ii) its commoditised plastic packaging products that are more vulnerable to price competition especially in a soft market, and (iii) rising interest rates and construction cost that may dampen demand for its new property launches. Furthermore, its valuations have become rich following the recent run-up in its share price. Downgraded to UNDERPERFORM from MARKET PERFORM.

Risks to our call include: (i) a stronger and sooner recovery in the global economy, (ii) easing of input costs, and (iii) easing of interest rates and inflation, resulting in strong demand for its properties.

Source: Kenanga Research - 16 Mar 2023